It's the economy stupid

It's the economy, stupid.
Investment & Pensions Europe, 1st July 2015

The prospects for US equity markets depend largely on the performance of the underlying economy

The S&P 500 hit all-time highs in the first half of 2015 but opinion is divided on what the implications may be for investors. “Valuations are stretched but they are not yet at the level consistent with the market peak seen in the last 25 years,” says Russ Koesterich, chief investment strategist at BlackRock. “Stocks should be able to go higher and the bull market will not stop at the first Fed tightening”.

Paul Quinsee, chief investment officer, US equities, at JP Morgan Asset Management is even more sanguine about high valuations: “Valuations are in fair territory – they are not cheap and they are not expensive. At 17 times price-to earnings relative to a long-term average of about 16 times, we don’t feel this is overly stretched, particularly relative to bonds, which continue to look extremely expensive”.

But many would dispute the optimists’ case. Andrew Smithers, an independent economist based in the UK, says the US market is overvalued by 80%. CT Fitzpatrick, chief investment officer of Vulcan Value Partners, an Alabama based boutique with about $11.5bn (€10.3bn in assets under management, has closed his US equity funds to new investment. Fitzpatrick comments: “Valuation levels are not as attractive as a few years ago and returns, looking forward, do not look as attractive as those we have seen over the past five years.”

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It's the economy stupid